2: Macroeconomics and Foreign Investment

Atif Mian (Princeton University) presented his thoughts on “Pakistan’s long-term growth prospects”. He noted that Pakistan has fallen behind India in terms of growth rate, foreign investment and exports, especially since 1992 and that innovations and structural changes are needed for Pakistan to prosper in the long run. The chair for the session, Arvind Mayaram (Secretary, Dept. of Economic Affairs, Ministry of Finance, Government of India) emphasised the need for political stability to achieve macroeconomic equilibrium.

Ehsan Choudhari (Carleton University) presented his IGC project on “Monetary Policy in Pakistan: The Role of Foreign Exchange and Credit Markets”. The aim of the project is to create a rigorous, yet policy relevant model of monetary policy using the new Keynesian framework. The key results include that, interest rates have a relatively weaker impact on inflation and outputs in Pakistan and that fiscal authorities need adjust taxes and expenditures to control public debt levels.

Ila Patnaik (National Institute of Public Finance and Policy, India) presented her IGC project on “Foreign Investors under stress: Evidence from Indian Firms”. This paper examines whether tail events in the home country trigger off extreme responses by foreign investors and whether foreign investors have a major impact on domestic markets through large movements of funds. The results suggest no clear evidence, as in some cases, foreign investors do exacerbate extreme movements in stock price returns, in other cases potentially stabilising prices. Arvind Mayaram remarked that in India, FII and FDI can flow in opposite directions in the time of crisis, between May-July 2013, a large amount flew out of India through FIIs while FDI grew in the same period.

The panellist for the session, Mr. Hasan Nawaz Tarrar (Federal Secretary, Planning and Development, Pakistan) commented that the issue of human development needs to be addressed as the foremost in the subcontinent, as it is key to achieving inclusive growth. Arvind Virmani (President, Chintan) noted that sustaining a high growth rate is important as accelerating the growth rate and that security, not governance, is a necessary condition to achieving high growth. Ibrahim Stevens (Country Programme Director, IGC) noted that for any economic model to be useful, it must answer policymaker’s concerns and that therefore it is important for economists to speak with policymakers before building models to answer policy-relevant questions.

By Noopur Abhishek, Country Economist, IGC India-Central